University Clearing

Model agencies collude to fix rates

Introduction to behavioural economics

Behavioural economics attempts to understand the effect of individual
psychological processes, including emotions, norms, and habits on
individual decision-making in a variety of economic contexts.

Homo economicus

All economic behaviour involves decision-making by individuals, and
traditional (neo-classical) theories of economic behaviour assume that
economic agents apply rational thought to each and every decision to
achieve the maximisation of personal benefit (utility) or, in the case
of producers, the maximisation of profits. The assumption of the
rational individual ('economic man' or homo economicus) is central to most micro-economic theory, and can be
seen most clearly in marginal analysis. Marginal analysis suggests that
economic agents carefully weigh-up the expected costs and benefits of
alternative decisions based on accurate information, and select the
option that maximises their personal gain. In other words, individual
economic agents are driven by self-interest, and if all agents are
driven by self-interest based on all the information they have, each
marginal decision will be rational.

This idea underpins the theory of how markets work to allocate scarce
resources, and is the basis of micro-economics, yet the real world seems
full of examples of where decision making does not seem rational, nor in
the individual’s self-interest. The cases of cigarette smoking,
over-eating, and failing to save enough for retirement are just a few of
the apparently irrational decisions routinely made by individuals across
the developed world. Behavioural economics challenges the long held view
in mainstream economics that individuals are ‘unemotional’ maximisers
who make rational decisions – rational actors being identified as
homo economicus. It also offers suggestions as to how individuals
can be ‘nudged’ towards more effective decision-making.

They the use ‘unbounded willpower’ to convert wants into actions
and consumption (or production), and have absolute self-control when
confronted with choices. In other words, they can resist making
‘poor’ choices.

They are driven by ‘unbound selfishness’ to achieve maximum
benefit for themselves.